Economists: Possible recession could be mild

Expert says consumers, economy in good shape

Despite a solid economy and booming job growth, the specter of recession is looming ever larger as a growing number of economists raise their odds for a downturn and the stock market takes a historic drubbing. Here’s the good news: If there is a slump, top economists say, it probably will be relatively mild.

Think early 1990s and 2001 slides, not the job-killing collapses of 200709 and 2020 that were triggered by the housing crisis and the pandemic.

“If it were to happen, it wouldn’t last long, it would not be severe, and we’ll be on the other side of it quickly,” says Mark Zandi, chief economist of Moody’s Analytics.

That’s largely because U.S. consumers and the economy are in good financial shape, with few signs of the kind of excesses that have triggered past downturns, Zandi says.

Fueling the growing recession chatter is a confluence of shocks to the economy. Inflation is at a 40-year high of 8.3%, and the Federal Reserve is raising interest rates aggressively to fight it, both of which are burdening consumers with higher costs and starting to squeeze corporate earnings.

As a result, the Standard & Poor’s 500 index is down nearly 20% from its peak early this year, pushing it close to bear market territory on Friday.

Although the health crisis largely has eased and Americans are resuming activities like traveling and going to sporting events, it hasn’t gone away. COVID-19 cases have recently spiked from low levels.

Meanwhile, Russia’s war in Ukraine and China’s new Covid-19-sparked lockdowns pose new hurdles to unwinding the global supply chain bottlenecks that have kept inflation elevated.

Here’s one plausible recession scenario: As prices and interest rates climb and the battered stock market makes investors feel less wealthy, consumers will pull back spending. Businesses will rein in investment and hiring while expanding layoffs. Economic activity will start to slow, and job losses will mount.

Zandi puts the chances of a recession at 33% within the next 12 months and 50% within two years but believes the nation will probably sidestep it. More than half of economists and other experts surveyed by the National Association of Business Economics say the risk of a downturn within 12 months is greater than 25%, according to a report out Monday.

Although both retail sales and job growth were robust in April, there are early signs of a slowdown, says Paul Christopher, head of global market strategy for Wells Fargo Investment Institute. Initial jobless claims – a gauge of layoffs – were historically low last week at 218,000 but marked a four-month high. Mortgage applications and existing-home sales have been tumbling amid rising interest rates. And credit card spending has declined.

If there is slump, Zandi reckons it will start at the end of the year and last five or six months. Economic output, he says, probably would fall 2%, 3 million jobs would be lost, and the unemployment rate would rise from April’s 3.6% to about 5%.

That’s not a good thing. But during the Great Recession of 2007-09, gross domestic product fell 3.8%, 8.7 million jobs were wiped out, and unemployment reached 10%, according to Labor Department figures and Wells Fargo. In the COVID-19 slump in 2020, GDP fell by more than 10%, 22 million jobs were erased, and unemployment reached 14.7%.

Christopher is more sanguine than Zandi. He estimates GDP will fall 1.3% in a recession he believes will begin late this year and unemployment will rise to 4.4%. That would equate to about 2 million jobs lost.

“There’s no reason to think the bottom is going to fall out of the economy,” Christopher says.

Thomas Goldsby, a professor of supply chain management at the University of Tennessee, even thinks a mild downswing would have a silver lining by giving backed-up supply chains a chance to heal, relieving inflation pressures.

“A little slowdown might tamper the chaos a bit,” he says.

Here’s why economists think any recession probably would be contained:

Americans still have $2.6 trillion in excess savings from hunkering down during the pandemic, federal stimulus checks and other aid, Zandi says. Even if inflation and higher interest rates force people to adjust spending, they’re not going to close their wallets just as summer and a resumption of traveling and other activities beckon.

Household debt payments amounted to 9.3% of disposable personal income in the fourth quarter, a figure that has edged up recently but is down from 9.9% in late 2019 and 13.2% in 2007 before the Great Recession.

Corporate debt is at a record high, but in line with long-term trends relative to GDP, says RBC Wealth Management.

Severe recessions are often triggered by dramatic imbalances, Zandi notes, such as the commercial real estate crisis in the early 1990s, the dot-com meltdown in 2000 and the housing crash of the 2000s. No such crises are evident. Housing and stock prices have been overvalued but are now falling, and they’re not bubbles waiting to burst, he says.

Job openings and the number of people quitting jobs reached record highs in March, Labor Department figures show. That has kept wages rising sharply. Such trends probably will ease but won’t completely reverse, giving consumers the wherewithal to keep spending, Christopher says.